Trump Plan to Use False Claims Act Against DEI May Face Headwinds (1)

President Donald Trump’s executive order on “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” is an ambitious gambit: using the False Claims Act as a lever to curtail diversity, equity, and inclusion programs among federal contractors and grant recipients. In effect, the order requires contractors to certify that they don’t have unlawful DEI policies—and sets them up for potentially ruinous FCA investigations and lawsuits if they do.

A Maryland judge recently blocked some aspects of the executive order on constitutional grounds, the US Court of Appeals for the Fourth Circuit has lifted the injunction, allowing the order to go into effect while the appeal plays out. But even if that injunction doesn’t stand, recent judicial trends suggest that the administration’s approach may face significant headwinds.

Courts have increasingly reined in executive branch authority to create major rules without specific congressional authorization. Several have particularly questioned presidents’ power to implement broad social policies through federal contractor requirements. At the same time, the bar for establishing FCA violations based on technical noncompliance with regulations has also risen, with courts demanding stringent proof of materiality and unlawful intent.

Statutory Authority

The executive order’s authority stems from the Federal Property and Administrative Services Act of 1949, but such a foundation may be shakier than it appears. FPASA only authorizes contractor rules designed to create an “economical and efficient” procurement system. Recent decisions suggest courts are skeptical about whether FPASA can support broad social policy mandates.

Consider the fate of former President Joe Biden’s Covid-19 vaccination mandate for federal contractors. Multiple circuit courts found it was unauthorized and unlawful, with the US Court of Appeals for the Sixth Circuit in Kentucky v. Biden emphasizing that FPASA was meant to improve government efficiency, not control contractors’ internal operations.

The Fifth Circuit in Louisiana v. Biden, and the Eleventh Circuit in Georgia v. Biden, went further, invoking the “major questions doctrine"—requiring specific congressional authorization for policy changes of “vast economic and political significance.” Citing analysis in the US Supreme Court’s earlier Chrysler Corp. v. Brown decision, courts in several cases specifically questioned whether federal contractor requirements could ever be used to enforce anti-discrimination rules.

Similarly, in last year’s Nebraska v. Su decision, the Ninth Circuit held that Biden’s executive order imposing a $15 minimum wage on federal contractors exceeded FPASA’s authority because it didn’t further the statutory goals of efficiency and promotion of “full and open competition.” Given the Supreme Court’s recent limitations on executive authority—including overturning the decades-old Chevron doctrine and restricting agency discretion to interpret statutes and regulations—courts may resist allowing sweeping social reform through federal contracting processes.

FCA-Specific Hurdles

Even if courts uphold the order’s statutory basis, FCA cases face substantial hurdles. To establish liability, the government must prove scienter—that contractors knew their certifications of regulatory compliance were false. This requires showing that the contractor’s interpretation of anti-discrimination laws was wrong—and that they knew it was wrong or were reckless in not knowing.

This poses challenges, given Title VII’s complex jurisprudence around affirmative action and diversity initiatives. Litigation such as the Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard has produced varying interpretations of permissible practices. DEI programs’ multifaceted nature further complicates matters. Some elements may clearly comply with Title VII, while others operate in ambiguous legal territory.

The FCA’s materiality requirement presents another significant obstacle. The Supreme Court’s decision in Universal Health Services v. U.S. ex rel. Escobar established a demanding and rigorous standard for proving false statements were material to payment decisions. While the executive order explicitly states that anti-discrimination compliance is “material,” Escobar held that such labeling isn’t sufficient—materiality must be demonstrated in practice.

Some courts have found that materiality requires false certifications to go to the “essence of the bargain” between contractor and government. For example, in United States ex rel. Holt v. Medicare Medicaid Advisers, the Eighth Circuit held that certain insurers’ misstatements about compliance with Medicare marketing regulations weren’t material under the FCA because they didn’t affect Medicare’s or the insurers’ “ability to provide healthcare services to those who qualify.” It isn’t clear that a contractor’s diversity policies would meet that standard, as they don’t concern the fundamental quality of goods or services provided.

Key Takeaways

Despite these challenges, federal contractors and grant recipients shouldn’t grow complacent. Whistleblowers likely will seek opportunities to report alleged violations, and Trump’s Department of Justice may eagerly pursue such cases to pressure companies into abandoning DEI programs. The potentially massive FCA penalties make the legal barriers to liability less reassuring than they might appear.

As an initial matter, organizations that want to maintain DEI programs should track the progress of the ongoing federal litigation in Maryland over the constitutionality of the new executive order. If the Fourth Circuit or the Supreme Court lifts the injunction, then the risk of FCA liability may become more immediate.

To reduce risk, even while that litigation is pending, such organizations should thoroughly document their Title VII compliance analysis, including both supportive and cautionary legal opinions.

They should review DEI initiatives through the lens of recent Supreme Court precedent—particularly, Students for Fair Admission, paying particular attention to any programs that could be viewed as providing preferential treatment based on race, sex, or other protected characteristics. And they should implement and document a process for reviewing compliance before providing any DEI-related certifications, in order to demonstrate a good-faith effort to avoid material false statements.

The current regulatory environment demands careful navigation. Aggressive DEI programs risk FCA liability, while overcorrection could create workplace diversity problems and recruitment challenges. While scienter and materiality requirements provide some protection, thorough preparation and genuine compliance efforts remain essential to threading this needle successfully.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Joshua M. Robbins is a former federal prosecutor and is co-chair of Buchalter’s white collar and investigations practice group. He represents health-care providers and government contractors in government investigations and litigation under the False Claims Act.

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(Updates second paragraph with additional information on injunction.)