A federal appeals court just denied Anthropic’s emergency request to temporarily halt the Pentagon’s blacklisting of the AI startup, dealing a significant blow to the company’s ability to compete for defense contracts. The ruling means Anthropic remains on the Department of Defense’s supply chain risk list while its lawsuit challenging the designation moves forward, potentially shutting the company out of lucrative government AI deals at a critical moment for the industry.

Anthropic hit a major legal roadblock in its fight against Pentagon blacklisting. A federal appeals court denied the AI company’s request for a stay, leaving the startup on the Department of Defense’s supply chain risk list while its lawsuit grinds through the court system.

The decision, handed down Wednesday evening according to court documents via CNBC, means Anthropic can’t bid on or participate in DOD contracts for the foreseeable future. That’s a painful setback for a company that’s been positioning itself as a safer, more transparent alternative to rivals like OpenAI and Google in the enterprise AI market.

The Pentagon’s supply chain risk designation typically gets applied to companies with foreign ownership concerns or security vulnerabilities that could compromise national defense systems. What landed Anthropic on the list remains unclear from public filings, but the company clearly considers the designation damaging enough to wage an aggressive legal battle.

Timing couldn’t be worse for Anthropic. The federal government has become one of the biggest potential customers for AI technology, with agencies from the Pentagon to the intelligence community racing to integrate large language models into everything from logistics to threat analysis. Microsoft recently scored a multi-billion dollar contract to provide AI services across defense agencies, while Amazon has been building out its AWS GovCloud specifically for classified AI workloads.

Anthopic raised $7.3 billion in its last funding round, reaching a valuation near $18 billion with backing from