Battle Royal: DoD vs Anthropic From Operating on Classified Networks to Being a Banned Supply Chain Risk

By:  Margaret M. Cassidy & Andrew Swick

1. Overview

The Department of Defense (DoD) and Anthropic demonstrated what a battle contract negotiations can be.  Negotiations between the two blew up in a spectacular way on February 27, 2026, when Secretary of Defense Hegseth publicly labeled Anthropic a supply‑chain risk and ordered businesses in the DoD supply chain to cease commercial activity with the company. President Trump then directed all federal agencies to stop doing business with Anthropic.  In a letter dated March 3, 2026, Hegseth advised Anthropic that it presented a supply chain risk and DoD had to take action to protect national security.

This situation is notable because:

• Anthropic is a domestic business, not a foreign entity
• The designation seems to be tied to an impasse in negotiations and “ideology” not national security
• Claude was the primary AI platform on DoD’s classified networks and will continue to be there during the wind down of its work with DoD.

On March 9, Anthropic filed a complaint against DoD, other Federal agencies that banned it as well as the Federal officials running these agencies.

Will Anthropic prevail in court?

Read on for each party’s position as well as a summary of the applicable law.

2. DoD’s Position

According to media reports, DoD wants to use Claude for “any lawful purpose” and will not restrict use of technology that puts military personnel at risk.  [Here is The Hill article with this information.]

This position traces back Secretary Hegseth’s January memo on DoD’s AI strategy. [Here’s the memo.]. In the memo, among other things, Hegseth declared that the U.S. military must adopt emerging AI technologies to dominate adversaries with lethality and efficiency. To accomplish this, the memo directs DoD to take certain actions.

One is likely the issue that caused negotiations to go south with Anthropic: that DoD cannot rely on AI models that have “may limit lawful military applications.” Thus, DoD AI contracts must include language that the AI model may be used for “any lawful use”, to include deploying it with autonomous weapons.

DoD officials and Trump took to social media to declare that the government would no longer do business with Anthropic.  And, in the March 3^rd letter Hegseth said that pursuant to 10 USC 3252, a military statute that directs DoD procurements and pursuant to the DFARS, Anthropic was a supply chain risk and DoD had to take “covered procurement actions” against Anthropic to protect national security.

3. Anthropic’s Position

Anthropic filed a lawsuit in federal court in the Northern District of California on March 9^th in response to being labeled a supply chain risk under this military procurement statute. Anthropic explained in its complaint that it partnered with the federal government, including DoD, since June 2024, and that its frontier-AI was one of the first deployed on DoD’s classified network. (Here is Anthropic’s complaint.)(Here is a good article from Technology Magazine on the situation).

At the end of 2025 and early 2026, DoD sought to revise the contract.  According to Anthropic negotiations broke down for refusing to allow DoD to use Claude:

• For mass surveillance in the U.S. because Claude has not been tested for this use and believes it violates fundamental rights.
• To operate fully autonomous weapons, that is, weapons that operate without human involvement once the weapon is launched. Anthropic has not been tested for this use so did not want DoD to use Claude with these weapons because of the risk to civilians and U.S. military personnel.

Anthropic says that DoD gave it an ultimatum to either allow DoD to use Claude for “all lawful purposes” or be banished from the defense supply chain.

Anthropic did not cave to DoD.  In response DoD formally labeled it a supply chain risk using the military procurement statute and banned DoD, the entirety of the federal government as well as entities in the government supply chain from using Anthropic products.  Anthropic claims this determination is:

• “Unprecedented”
• Inconsistent with the law because it:
  • Violates the First Amendment because it limits its free speech
  • Violates the Due Process guaranteed by the Constitution
  • Fails to comply with the statute allowing for designating a business a supply chain risk. (This blog will not address all Anthropic’s claims.)
• Has caused and will continue to cause it irreparable harm
• Done to intimidate and punish the company [Here is Anthropic’s statement]

4. Supply Chain Risk – There Are Laws on What That Is and How It Works

Since there are businesses that do or could pose a supply chain risk to the federal government if they provide certain technologies, laws permit banning them from doing business with the government or excluding them from procurements.

There are two primary laws that define the process for designating a business a supply chain risk:

1. Requirements For Information Relating to Supply Chain Risk (10 U.S.C. § 3252)
   • Applies only to DoD for the most part
   • The law DoD relied on in a March 3^rd letter to Anthropic designating it a supply chain risk
   • Will be discussed in this post
2. Federal Acquisition Supply Chain Security Act (FASCSA) (41 U.S.C. §§ 1321–1328; 41 U.S.C. § 4713)
   • Applies across all federal agencies
   • The law DoD relied on in another March 3^rd letter to Anthropic designating it a supply chain risk.
   • Is discussed here on The Defense Salon website

Before dissecting the law DoD relied on to ban Anthropic, the U.S. Constitution’s Due Process Clause must be considered.  The due process requires that before the government can take property or an interest in property it must provide notice and an opportunity to be heard.

Anthropic pleads in its complaint that the government violated the Constitution by taking its property interests without due process.

With that in mind – let’s turn to legal requirements the federal government must follow to designate a business a supply chain risk and what the government can do to a business that is a risk.

Military Law Acquisition Planning, Requirements for Information Relating to Supply Chain Risk and the DFARS (10 USC § 3252, DFARS 239.73)

 Authority: This is one of the legal authorities the federal government used to:

• Designate Anthropic a supply chain risk
• Ban Anthropic from working with the government
• Prohibit commercial entities in the government supply chain from any commercial activity with Anthropic

This law does allow the Secretary of Defense to carry out defined “procurement actions”, which are defined in the statute, and to limit the disclosure of information relied on to take the actions.

Identifying Risks:  This law requires that the Secretary consult procurement

officials and other officials in the agency who would be relevant in determining if an entity is a supply chain risk.  This would likely include those in intelligence and cybersecurity.

Before taking procurement action against an entity, DoD must have evidence that the business “may sabotage, maliciously introduce unwanted function, extract data, or otherwise manipulate the design, integrity, manufacturing, production, distribution, installation, operation, maintenance” or surveil IT systems used for national security.

 Written Findings:  After making the finding, DoD must issue a written

determination on its decision that an entity is a supply chain risk, which can be

classified or unclassified, explaining:

• The specific supply chain risk
• Why actions are necessary to protect national security, and
• Why less restrictive measures are not reasonably available.

If DoD limits disclosure of the information used to make its decision, then it must explain why disclosure would pose a national security risk.

Hegseth’s letter to Anthropic, according to Anthropic’s complaint, stated that:

• Using Anthropic’s products and services on DoD systems is a supply chain risk
• Banning Anthropic is necessary to protect national security
• Less intrusive measures are not reasonably available to reduce the risk
• It is taking all “covered procurement actions” allowed pursuant to the law
• Its covered procurement actions apply to all DoD procurements.

This letter does not provide a specific risk; it is instead makes conclusions without facts. Nor does the letter define “covered procurement actions”.  Instead it refers to a Defense Acquisition Regulation (DFARS), Requirements For Information Relating to Supply Chain Risks, which does define the procurement actions that DoD can take once it determines an entity is a supply chain risk. (Click here for DFARS 239.7305).

Notice & Opportunity to be Heard:  DoD is permitted to limit the disclosure of the

information it used to make the determination that a business was a supply chain risk. If DoD limits the disclosure of information it used to make the decision, then, the law says that DoD’s actions to mitigate the supply chain risk cannot be challenged in a ‘bid protest’ case filed in court.  A bid protest case is a court case by a losing bidder challenging the federal government’s decision to award a contract to another bidder.

When designating a business a supply chain risk, DoD must:

• Notify the impacted parties to include its reasons but only as needed to execute the decision
• Notify other Federal agencies that may face a similar supply chain risk
• Keep these notifications are confidential

This section does not prohibit a contractor, like Anthropic, from filing lawsuits other than a bid protest.  And, if DoD publicly explains its reasons for taking action against a contractor, then a contractor may file a bid protest, if the contractor lost a contract because of the decision to label it a supply chain risk.

 Result of Being a Supply Chain Risk:  Once DoD determines a business is a supply chain risk there are the only three “covered procurement actions” it can take:

• Exclude the business from DoD procurements for failing to meet required qualification standards for reducing supply chain risk
• Exclude the business from DoD procurements for failing to have an acceptable evaluation rating because it is a supply chain risk
• Direct a contractor to not use a subcontractor because it is a supply chain risk.

This section does NOT authorize DoD or the federal government more broadly to:

• Ban a contractor from working with DoD
• Ban a contractor from working with any federal agency
• Prohibit federal government contractors from doing any commercial business with the contractor that is the supply chain risk

Congress:  DoD must notify Congress of its decision, to include explaining the risk and why less intrusive measures are not available to reasonably reduce the risk.

 Who Will Win This Battle?

Before a court renders its decision, it is rarely clear who will be the victor.

It seems though, given the law and the facts in this case, Anthropic stands a better chance of success in court than the government for the following reasons.

1. Lack of Facts Proving That Anthropic Is a Supply Chain Risk

The federal government essentially designated Anthropic a supply chain risk for having “ideological whims” which make it “incompatible with American principles” so “no contractor, supplier, or partner that does business with the United States military may conduct any commercial activity with Anthropic.”

The federal government made no claims that Anthropic may sabotage, extract data, or otherwise impair the operations of any national security IT systems.

Plus, Anthropic’s technology was on classified systems, and it will remain on DoD classified and other systems because DoD is allowing a winddown time period in which Claude will be removed from DoD IT systems.  Anthropic said in its complaint that it is FedRAMP qualified which is significant because FedRAMP qualified technology companies have gone through a rigorous assessment to confirm they have security controls in place.  These facts demonstrate that the government determined that Anthropic was an acceptable business partner.

If Anthropic is a supply chain risk as defined by the law, DoD would not have permitted its technology onto classified systems and permit them to remain in any government IT system.

Point goes to Anthropic.

2. The Federal Government’s Actions Are Not Supported by Law

As discussed above, when a business is designated as a supply chain risk DoD can:

• Exclude a business from procurements
• Direct a prime contractor not to subcontract to a particular source.

The military procurement law DoD relied on does not allow DoD to:

• Ban an organization across government
• Prohibit all federal government contractors from doing any business to include commercial business with the banned organization.

In fact, in its letter to Anthropic citing to the military procurement law and to the DFARS, DoD itself says it is taking the action allowed by law and not any more than that.

Point goes to Anthropic.

3. Decision Appears to Be Arbitrary and Retaliatory

 DoD can take the actions described above only after it followed the procedures detailed in the law and when it has facts establishing a business is a supply chain risk.  Governmental decisions to take a property interest because a business would not cede a position in contract negotiations or because the business is perceived to have certain philosophies, are not grounded in law or facts and present as being arbitrary and retaliatory.

If the court makes that determination, then it will likely conclude that the government took Anthropic’s property interest without due process of law.

Point goes to Anthropic.

Contractors & Subcontractors Should Consider:

• Assessing exposure immediately. If you are a federal contractor or subcontractor doing business with Anthropic, review your contractual obligations and termination provisions to determine if continued performance is permissible and whether the government’s directive creates a legal obligation—or merely a strong incentive—to disengage from Anthropic.
• Whether the government directives apply. The government’s directives to sever relationships with Anthropic may vary by contract vehicle, agency, and program. Consider conducting a fact-specific legal assessment before taking action, particularly where termination could trigger breach or performance issues on a Federal Government contract.
• Document decision‑making. Maintain contemporaneous records of communications, legal analysis, business decisions and any direction from prime contractors or contracting officers related to changing relationships with Anthropic or with the government related to Anthropic. This documentation may be critical if disputes arise later with either the government or Anthropic.
• Know the rules at the negotiating table. If you are negotiating with the federal government—or seeking to enter the market—understand when and how the government can direct contractor actions, impose conditions, or take adverse action. Missteps during negotiations can create contractual terms you cannot meet, issues around payment, long-term compliance and enforcement risk.