Federal Targets, First Settlement Underscore Corporate DEI Risks

The Justice Department has kept its word to go after corporate diversity, equity and inclusion with a first-of-its kind federal contractor settlement, leading companies to grapple with practices that could strap them with subpoenas, court dates, or hefty payments to the government.

Tying executive compensation to diversity metrics, walling off affinity-based groups and programs, and setting diversity targets for hiring pools are among the allegations technology company International Business Machines Corp. will pay $17 million to resolve. Justice Department comments and media reports had shown the agency’s interest in DEI practices in the private sector. But no case was confirmed until the department announced a settlement with IBM April 10.

Other companies are likely taking note—even as businesses have a number of defenses if they come under legal fire.

“It sends a message to everybody else that if you haven’t stopped the practices, if you’re going to continue with this, you face a lot of risks,” said Sara McLean, partner at Akin Gump Strauss Hauer & Feld LLP.

IBM’s settlement—the first under the department’s “civil rights fraud” initiative—showed the government’s determination to rid contractors of DEI practices, McLean said. The Trump administration also doubled down by releasing another executive order attempting to shore up contract provisions in its favor. That directive has been challenged in federal court.

“The government is serious about pursuing these cases,” said David Cohen, founder and president of DCI Consulting Group Inc. “We’re going to see more of them.”

Company Practices

Existing anti-discrimination laws, President Donald Trump’s earlier orders, and the most recent executive order paint a confusing picture when taken together, Cohen said.

One thing, however, is clear: companies need to take stock of their programs and document the basis for any they keep, advisers said.

The Justice Department is using the False Claims Act, which prohibits fraud against the federal government, to pursue cases against contractors. The agency is making a case that businesses defraud the federal government when they have diversity programs, in part because of a 2025 executive order that prohibited “illegal DEI” for federal contractors.

A March 26 executive order banning “racially discriminatory DEI activities” for federal contractors went further. It asked companies to certify that DEI compliance is “material” to the government’s decision to pay them.

The department is also watching companies with demographic-oriented goals for potential violations, Brenna Jenny, deputy assistant attorney general in the DOJ’s Civil Division, said at a February conference.

Many companies have already dismantled their programs. Some of the largest government contractors, including Boeing Co. and RTX Corp., nixed things like employee resource groups and supplier diversity programs last year. Goldman Sachs Group Inc. and Deere & Co., among others, recently dropped diversity criteria from board director candidate pools.

Businesses should look annually at whether their practices constitute quotas, preferences, or set-asides for protected classes, Cohen said. They should also evaluate whether programs could constitute harassment based on protected status.

For programs like employee resource groups and leadership programs, one key is making sure they’re open to everyone—not just a specific group, said Scott Kelly, shareholder at Ogletree Deakins.

But companies shouldn’t stop tracking workforce analytics, Cohen said. Running those numbers is important for risk mitigation, as even the appearance of preference could attract the wrong kind of attention, he said. For some companies, demographic tracking is even required under civil rights law.

“It’s perfectly legal and OK to collect demographic data on applicants and employees,” he said.

Trump’s March executive order also imposed liability on contractors for their subcontractors’ DEI policies.

Companies are used to evaluating their own hiring and leadership practices. But overseeing supply chains is a new ask, said Lisa Dykstra, partner at Morgan Lewis.

Questions remain about whether the government expects companies to act as a watchdog, or simply report what’s in their direct line of sight. Either way, contractors can’t claim ignorance, said O’Kelly McWilliams, partner at Holland & Knight LLP.

“If you are being a careful and diligent federal contractor, you have to at least take some kind of review and get some guidance from your subcontractors to ensure that they are in full compliance,” he said.

Defenses and Settlements

The outcome of other DEI-related investigations—which reportedly include Verizon Communications Inc. and Google, first reported by The Wall Street Journal—will shed more light on how companies are likely to react.

False Claims Act cases are a big deal, as complying with subpoenas and possibly going to court are costly and time consuming, Dykstra said. These cases also carry the risk of treble damages, wherein an offending party would have to pay three times the actual damages.

Although businesses have strong counter arguments to deploy if they decide to fight, sometimes settling is more appealing, McLean said.

“There are a lot of reasons to make a business decision to settle a False Claims Act case, even when a company has defenses,” she said.

For retroactive cases—the IBM probe, for instance, dealt with alleged practices dating back to 2019—defenses are even stronger, McLean said. Company counsel could question whether the violations are material and done knowingly.

“Not only was this not considered illegal DEI in prior administrations, but even in this administration, it’s been a moving target,” McLean said. “When you’re talking about a fraud statute where companies are only liable if they have recklessly submitted a false claim, that creates some defenses.”

IBM didn’t comment on its decision to settle.

Trump’s latest executive order asks companies to certify that DEI programs constitute a material violation under the False Claims Act. But just because a contract says that doesn’t make it so, Dykstra said. Courts would have to decide—and it’s a heavy standard, she said.

“Illegal DEI” implies the existence of “legal DEI,” Cohen said, and McWilliams agreed.

“I want to make it clear that DEI by itself is not unlawful,” he said.