Anthropic’s Department of War lawsuit is even higher-stakes amid the AI boom | Fortune

For more than a week preceding the lawsuit, the Pentagon and Anthropic had been locked in a very public and increasingly acrimonious conflict. At the heart of the dispute lay fundamental disagreements over how the Trump Administration could—and, more critically, could not—utilize advanced artificial intelligence systems developed by the company. This culminated last week in a drastic move by Secretary of War Pete Hegseth, who unilaterally designated Anthropic a "supply chain risk." This designation, typically reserved for foreign adversaries or entities with questionable national security ties, sent shockwaves through the tech industry, immediately raising questions about its legality, its precedent-setting nature, and the chilling effect it could have on other technology companies collaborating with the government.

In its lawsuit, filed yesterday in the U.S. District Court for the Northern District of California, Anthropic unequivocally asserts that the Pentagon’s actions are both "unprecedented and unlawful." The company argues that the designation lacks a legitimate basis and serves as an arbitrary and capricious exercise of power, potentially violating its constitutional rights to due process and fair competition. The immediate, tangible fallout for Anthropic has been devastating: the lawsuit claims that "hundreds of millions of dollars" worth of government contracts, essential for funding its advanced research and development, have either been summarily canceled or placed in severe jeopardy. This financial blow is not merely a setback; it threatens to undermine Anthropic’s competitive edge in the fiercely contested AI landscape, where securing substantial government contracts often provides a critical revenue stream and validation for emerging technologies.

Anthropic’s official statement, provided to my colleague Beatrice Nolan, encapsulated the company’s determined stance: "Seeking judicial review does not change our longstanding commitment to harnessing AI to protect our national security, but this is a necessary step to protect our business, our customers, and our partners." This carefully worded statement underscores the delicate balance Anthropic is attempting to strike. It reaffirms a patriotic commitment to national security, a strategic posture vital for any tech firm seeking to work with the U.S. government, while simultaneously drawing a firm line against what it perceives as overreach. In essence, the message is clear: "we’re not letting this go." The company is signaling that while it values collaboration with the defense sector, it will not tolerate actions that it believes unjustly jeopardize its commercial viability and operational integrity.

While the specifics of the "supply chain risk" designation are novel, the broader act of a large, emerging tech giant suing the government is not without precedent, albeit often under different circumstances. The tech industry has a history of legal battles with federal agencies, typically centered on procurement processes or regulatory challenges. Consider Palantir, the data analytics firm co-founded by Peter Thiel. In 2016, Palantir famously sued the U.S. Army over its intelligence software procurement process, alleging that the Army was biased towards traditional vendors and wasn’t providing a fair opportunity for innovative companies to compete. A federal judge ultimately sided with Palantir, forcing the Army to reconsider its approach. Similarly, in 2014, SpaceX, Elon Musk’s aerospace company, took legal action against the U.S. Air Force, demanding that its Falcon 9 rockets be allowed to compete for key military launch contracts, which had long been the exclusive domain of established players like United Launch Alliance. The two sides eventually settled, and SpaceX went on to secure numerous lucrative launch contracts in the ensuing years, fundamentally reshaping the space launch industry. Even established incumbents aren’t immune to these high-stakes conflicts: the Department of Defense’s ill-fated $10 billion JEDI cloud computing contract, initially awarded to Microsoft, triggered separate lawsuits from Amazon and Oracle, alleging unfair practices. That contentious imbroglio was only resolved when the government, in 2021, ultimately annulled the contract altogether, opting for a multi-vendor approach.

These historical examples demonstrate that legal recourse is a viable, albeit challenging, path for tech companies feeling aggrieved by government actions. However, the conflict between the Pentagon and Anthropic distinguishes itself not only by its sheer financial stakes but also by its profound ideological underpinnings. The core of the dispute touches upon deeply contentious ethical questions, particularly around "the extent to which AI can be used for autonomous killing." This is not merely a matter of who gets a contract; it’s a debate over the very future of warfare and humanity’s control over lethal force.

Anthropic, like many other leading AI research labs, has publicly committed to developing "safe and ethical AI." This often translates into advocating for strict human oversight in critical applications, especially those with potential for lethal outcomes. The designation as a "supply chain risk" by Secretary Hegseth suggests that the Trump Administration’s Department of War may perceive Anthropic’s ethical frameworks or internal guardrails as impediments to national security objectives or as a form of non-compliance with military requirements. Such a designation could imply concerns about Anthropic’s willingness to adapt its AI models for specific, potentially controversial, military applications, or its commitment to delivering solutions without imposing its own ethical constraints that the Pentagon might deem restrictive.

The financial magnitude of this clash cannot be overstated. Anthropic’s staggering $380 billion valuation underscores its pivotal role in the global AI race. In February, the company closed its $30 billion Series G funding round, an enormous capital injection that solidified its position as the primary challenger to OpenAI. The ongoing legal battle could significantly impact its ability to sustain this growth, attract top talent, and maintain its aggressive research agenda. As Fortune’s Jessica Mathews reported last week, while investors have largely "held the line" with Anthropic CEO Dario Amodei for now, backing his decision to pursue legal action, the prolonged nature of such disputes and the potential for a negative outcome could eventually test that loyalty. Investors are keenly aware that government designations like "supply chain risk" can deter future contracts, erode market confidence, and even impact international partnerships, especially for a company operating at the cutting edge of dual-use technology.

Beyond the immediate legal and financial ramifications, this conflict is poised to become increasingly public. It will undoubtedly fuel broader societal debates about the role of private tech companies in national defense, the ethical boundaries of AI development, and the appropriate level of government control over foundational technologies. The outcome of Anthropic v. U.S. Department of War could establish crucial precedents for how future administrations interact with the rapidly evolving AI industry, potentially influencing everything from procurement policies to the very definition of national security in the age of artificial intelligence. It highlights a growing chasm between the Pentagon’s imperative for technological superiority and the ethical considerations championed by some of the very innovators building these powerful tools.

A call for your questions… I’ll be interviewing Harvey CEO Winston Weinberg for the next episode of the Term Sheet Podcast, and I want to ask him your questions! Have questions for Winston? Send ‘em to [email protected].

See you tomorrow,

Allie Garfinkle
X: @agarfinks
Email: [email protected]

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VENTURE CAPITAL

Despite the high-stakes legal drama unfolding with Anthropic, the venture capital ecosystem continues to pour significant funds into innovative startups, particularly those leveraging AI, blockchain, and advanced manufacturing.

• KAST, a New York City-based platform simplifying stablecoin saving and spending, secured an impressive $80 million in Series A funding. This round was co-led by prominent investors QED Investors and Left Lane Capital, with participation from Peak XV Partners, HSG, and DST Global Partners, reflecting sustained interest in the fintech and cryptocurrency infrastructure space.
• Isembard, a London, U.K.-based manufacturer specializing in high-precision products for critical sectors like aerospace, defense, energy, and robotics, raised $50 million in funding. Union Square Ventures, Tamarack Global, IQ Capital, and a cohort of angel investors backed this venture, underscoring the strategic importance of advanced manufacturing in defense and emerging tech.
• Avvoka, a London, U.K.-based developer of AI-powered drafting technology tailored for law firms, raised £14 million ($18.7 million). Valhalla Ventures led the round, highlighting the ongoing digital transformation and AI integration within the legal sector.
• Axiomatic AI, a Cambridge, Mass.-based developer of AI tools specifically designed for science and engineering applications, closed an $18 million seed funding round. Engine Ventures led the investment, joined by Kleiner Perkins, Big Sur Ventures, G Vision Capital, Propagator Ventures, and Liquid 2, signaling strong confidence in AI’s potential to accelerate scientific discovery and industrial innovation.
• Escape, a San Francisco-based developer of agentic AI technology focused on discovering and fixing security vulnerabilities in engineering workflows, raised $18 million in Series A funding. Balderton led the round, with Uncorrelated Ventures and existing investors IRIS and Y Combinator also participating, pointing to the critical demand for AI-driven cybersecurity solutions.
• Levitate, a Raleigh, N.C.-based marketing platform for managing professional relationships, secured $16 million in funding. Harbert Growth Partners led the round, joined by Bull City Venture Partners and Northwestern Mutual Future Ventures, demonstrating continued investment in relationship-based CRM and marketing tools.
• Augur, a London, U.K.-based AI platform dedicated to protecting critical national infrastructure, raised $15 million in seed funding. Plural led the round, with First Kind, SNR, Flix, and Tiny VC also contributing, reflecting a growing focus on national security applications of AI.
• Shiva, a São Paulo, Brazil-based community platform designed for entrepreneurs utilizing AI to build new products, raised $10 million in pre-seed funding. Monashees led the round, joined by Endeavor Catalyst, indicating a vibrant AI startup ecosystem emerging in Latin America.
• Racquet 360, a Miami, Fla.-based padel and racket sports company, raised $9 million in funding from Sunrise Padel Capital, Profluence Capital, and Taktika Equity, tapping into the booming popularity of padel and related sports.
• Coral, a New York City-based platform offering rebates and financing for energy-efficient HVAC and electrical upgrades, secured $7.5 million in seed funding. ResilienceVC led the round, with Twelve Below, Floating Point, Accion Ventures, Blackhorn Ventures, Remarkable Ventures, and New Climate Ventures participating, highlighting investment in climate tech and sustainable infrastructure.
• Utexo, a Dubai, U.A.E.-based platform facilitating USDT transactions on the Bitcoin network, raised $7.5 million in seed funding. Tether, Big Brain Holdings, and Portal Ventures led the round, joined by Franklin Templeton, Maven11 Capital, Fulgur Ventures, Alchemy VC, and others, emphasizing innovation in cryptocurrency infrastructure.
• Yourco, a Chicago, Ill.-based company focused on frontline employee communication and intelligence, raised $6 million in Series A funding, led by High Alpha, reflecting the demand for tools to empower distributed workforces.
• Anchr, a New York City-based AI-powered operating system for food distributors, raised $5.8 million in seed funding from a16z Speedrun, Anterra Capital, Offline Ventures, Long Journey Ventures, and others, showcasing AI’s application in optimizing supply chains.
• Crafting, a San Francisco-based developer of AI agents for software development, raised $5.5 million in seed funding. Mischief led the round, joined by WndrCo and angel investors, underscoring the rapid advancements in AI-assisted coding.
• Cytotrait, a Manchester, U.K.-based gene editing company focused on food and agriculture, raised £3 million ($4 million) in seed funding. Northern Gritstone led the round, with the UK Innovation & Science Seed Fund and Northern Universities Ventures Fund also investing in sustainable food solutions.
• Intelligent Legal Solutions, a Chicago, Ill.-based legal technology company designed to automate workflows for private fund lawyers, raised $3 million in seed funding. Chicago Ventures led the round, reflecting the growing adoption of AI and automation in legal services.
• Orca Fraud, a Cape Town, South Africa-based fraud intelligence platform, raised $2.4 million in funding. Norrsken22 led the round, joined by OneDayYes, Enza Capital, and CV VC Africa, highlighting the increasing importance of fraud detection in emerging markets.

PRIVATE EQUITY

Private equity firms continue to drive consolidation and strategic growth across various sectors through targeted acquisitions.

• ISPN, a portfolio company of Align Capital Partners, acquired ZCorum, an Alpharetta, Ga.-based managed services and diagnostics provider for broadband service providers. Financial terms were not disclosed, indicating a strategic move to enhance ISPN’s service offerings in the telecommunications sector.
• Midland Industries, a portfolio company of Gemspring Capital, acquired Industrial Specialties Manufacturing, an Englewood, Colo.-based supplier of flow control parts. The acquisition, for undisclosed financial terms, expands Midland’s footprint in the industrial components market.
• Siris agreed to acquire a majority stake in TAKKION, a Centennial, Colo.-based integrated services provider for the renewable energy industry. Financial terms were not disclosed, signaling Siris’s commitment to investing in the burgeoning clean energy sector.

EXITS

Significant exits continue to reshape portfolios, with strategic buyers and large corporations acquiring promising businesses.

• Monomoy Capital Partners agreed to acquire Jiffy Lube International, the Houston, Texas-based quick lube and automotive service franchisor, from Shell for approximately $1.3 billion. This substantial transaction underscores the value seen in established, franchise-based service models.
• Agilent Technologies agreed to acquire Biocare Medical, a Pacheco, Calif.-based developer of automated immunohistochemistry instrumentation, from an investor group led by Excellere Partners and GHO Capital Partners for $950 million. This acquisition bolsters Agilent’s position in the diagnostics and life sciences market.
• Henkel agreed to acquire DeMert Brands, the Tampa, Fla.-based parent company of the popular Not Your Mother’s hair care brand, from Main Post Partners. Financial terms were not disclosed, but the deal signifies Henkel’s strategic expansion in the beauty and personal care segment.