A federal appeals court on Friday upheld the Pentagon’s blacklisting of Anthropic from military contracts, handing a victory to President Donald Trump and Defense Secretary Pete Hegseth in their battle with the AI startup over safety guardrails on its technology.

The 2-1 decision by the U.S. Court of Appeals in Washington came in a lawsuit by Anthropic challenging its March designation by the Pentagon as a national security supply chain risk, which the startup says has cost it billions of dollars in lost business and damaged its reputation ahead of a highly anticipated initial public offering.

The court’s majority said it was reasonable for the Pentagon to designate Anthropic after it refused to allow its products to be used for autonomous weapons or mass surveillance. It rejected Anthropic’s claim that the Pentagon had retaliated against it for its views on AI safety and ethics.

Siding with Hegseth’s argument that Anthropic’s safety restrictions could compromise military operations, the majority said, “The Secretary raises the deeply sobering prospect of overly constrained AI models shutting down unexpectedly and thus causing important military operations to fail,” in an opinion by Judge Gregory Katsas.

San Francisco-based Anthropic said in a statement Friday that it respectfully disagrees with the decision but remains confident in its position and is considering its options, including review of the three-judge panel’s decision by the full appeals court.

The White House and the Department of Defense did not immediately respond to emails seeking comment.

A federal judge in San Francisco last month struck down a parallel designation under a different law, finding the administration had unlawfully retaliated against Anthropic for its views on AI safety. U.S. District Judge Rita Lin in San Francisco also blocked Trump’s government-wide ban on Anthropic and Hegseth’s order barring military contractors from doing any business with the startup.

Hegseth designated Anthropic as a risk under two different laws after Anthropic refused to remove guardrails against its technology being used for autonomous weapons or mass domestic surveillance.

The unprecedented move came after months of negotiations ended in failure and public recriminations by Hegseth and Trump, who accused Anthropic of endangering American lives with ideological posturing.

Anthropic denied that characterization and said AI is not yet reliable enough to be safely used in autonomous weapons. The company also said it opposes domestic surveillance as a violation of fundamental rights.