* DJI says designation as a Chinese military company cost it

business deals

* Appeals panel found merit in DJI argument that

unclassified record did not support conclusion

* Other companies have challenged their designations, with

some success

(Adds DJI comment in paragraph 5)

By Jody Godoy and Karen Freifeld

Aug 14 (Reuters) - A U.S. appeals court on Friday ordered a

lower court to reconsider whether China-based DJI, the world's

largest drone maker, should be removed from a Pentagon list of

companies allegedly supporting Beijing's military.

The U.S. Court of Appeals for the District of Columbia

Circuit ruled that the lower court erred by relying only on the

unclassified record in concluding that the company contributes

to the Chinese defense industrial base.

DJI is one of a growing number of Chinese companies

challenging their placement on the Pentagon's list of Chinese

military companies. The list bars the Defense Department from

contracting with designated companies, and a broader ban on

buying their products via third parties takes effect in 2027.

"There is...no publicly stated rationale for why the

Secretary believes DJI contributes to the Chinese defense

industrial base," the appeals court said, sending the case back

to the lower court for further proceedings.

A spokesperson for DJI called the ruling "a significant step

toward correcting an unjustified designation." DJI has

consistently maintained it is not a military company, the

spokesperson said.

A spokesperson for the Defense Department said they do not

comment on ongoing litigation.

U.S. District Judge Paul Friedman in Washington last year

rejected a bid by DJI to be taken off the Pentagon's list of

Chinese military companies, instead granting summary judgment

against the Chinese firm.

LOST BUSINESS DEALS

In its lawsuit, DJI said the Defense Department's addition

of the company to the list was "unlawful and misguided." It said

it has "lost business deals, been stigmatized as a national

security threat, and been banned from contracting with multiple

federal government agencies."

The appeals court rejected DJI's arguments that it was

denied due process, that the unclassified record lacked evidence

that DJI received assistance from the government through efforts

initiated by the Chinese military industrial planning apparatus,

and that the department failed to explain why it treated DJI

differently from companies it believes are similarly situated.

However, the court found merit in DJI's fourth argument -

that the unclassified record did not support the conclusion that

the company contributes to the Chinese defense industrial base.

Earlier this month, another judge granted a preliminary

injunction barring the department from including Chinese

biotechnology company WuXi AppTec on the list. The

judge said the government lacked evidence to justify the

decision.

In June, the Pentagon expanded its blacklist to 188

companies, reflecting concern that China's military could tap

that country's private sector for advancements, amid

geopolitical ​tensions between Beijing and ​Washington.

Other businesses ⁠added to the list include e-commerce

company Alibaba ( BABA ), which sued in June seeking removal.

The Trump administration now calls the Department of Defense

the Department of War, but officially changing the name requires

action by Congress.