My understanding is that Anthropic requested visibility and a say into how their models were being used for classified tasks, while the DoD wanted to expand the scope of those tasks into areas that Anthropic found objectionable. Both of those proposals were unacceptable for the other side.
One of the many reasons every company has tried to shift their business model to the latter: greater control over users.
If you tell a gun dealer you're going to kill someone when you walk out of the shop, they have a right and an obligation to refuse the sale.
Please feel free to tell me how these analogies are incorrect.
They sold a service to a customer, contractually subject to terms they both agreed upon. How do people keep missing this? The government changed their mind after agreeing to the restrictions and tried to alter the deal with Anthropic ex-post-facto.