DEI Executive Orders Pose Risks for Federal Contractors

Recently, President Donald Trump issued two executive orders (the “executive orders”) seeking to end “illegal” diversity, equity and inclusion (“DEI”) programs in the workplace. Together, they direct all federal agencies to eliminate DEI initiatives, “enforce our longstanding civil-rights laws” and “combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.” The executive orders contain specific provisions targeted at government contractors, including new contract clauses that would impose liability under the False Claims Act (“FCA”) for violations of federal anti-discrimination laws. They also raise a number of complicated and novel legal issues that federal contractors will need to consider and address.

What the executive orders require

Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity, revokes a number of prior executive orders, including EO 11246—a 1965 order by President Lyndon Johnson—requiring federal contractors to develop affirmative action plans to promote equal employment opportunity. It also directs the Office of Federal Contract Compliance Programs (“OFCCP”) to “immediately cease” enforcement of these requirements, and prohibits it from “promoting ‘diversity’” or encouraging federal contractors “to engage in workforce balancing.” Federal contractors are permitted to continue operating under EO 11246 until April 21, 2025 (90 days from the issuance of EO 14173). EO 14173 leaves existing preferences in place for veterans, the blind and individuals with disabilities.

Next, EO 14173 requires agency heads to “include in every contract or grant award” a term requiring the contractor “to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” The contractor is also required  “to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material” for purposes of the FCA, subjecting federal contractors to treble damages and penalties under the FCA for violations of Federal anti-discrimination laws.

EO 14173 also contains provisions to encourage the private sector to end “illegal” DEI. To that end, the U.S. Attorney General, in consultation with each federal agency, must prepare a report identifying “[k]ey sectors of concern within each agency’s jurisdiction.” The report must also identify the “most egregious and discriminatory DEI practitioners” in each of those sectors. Each agency shall “identify up to nine potential civil compliance investigations of” large publicly traded corporations, non-profits, foundations, medical and bar associations and educational institutions. The potential targets of civil compliance investigations could include, but are not limited to, federal contractors. After her confirmation, Attorney General Pam Bondi directed Department of Justice (“DOJ”) staff to begin developing legal strategies for implementing the executive order. Her memo largely tracks the executive order, but it goes further than EO 14173 by directing the DOJ to consider proposals for criminal investigations in addition to the civil compliance investigations specified in the executive order.

Executive Order 14151, Ending Radical and Wasteful Government DEI Programs and Preferencing, is directed at activities and programs within the federal government, but also affects government contractors providing services supporting these activities.  The order instructs each agency to “[t]erminate, to the maximum extent allowed by law, all . . . ‘equity-related’ grants or contracts. . . .” Agencies must also provide the Office of Management and Budget (“OMB”) Director with a list of federal contractors who provided DEI training or materials to the government and all grantees who received federal funding to advance DEI or environmental justice programs. It further directs agencies to make recommendations relating to “enforcement activities, contracts (including set-asides), grants, consent orders, and litigating positions” in order to eliminate DEI.

Risks and recommended actions for federal contractors

Federal contractors will need to evaluate their current DEI policies and practices, including any affirmative action plans, and assess the potential legal implications.  Risks include potential FCA liability, civil and criminal investigations and enforcement actions, termination of existing grants and contracts and impacts to future contracting opportunities. Contractors should not make any changes to their policies with respect to veterans and individuals with disabilities, including related affirmative action plans, because these requirements remain in place and will continue to be enforced by the OFCCP.

Initially, contractors will need to evaluate whether any of their DEI policies or initiatives violate federal anti-discrimination laws. The executive orders target “illegal” discrimination but are vague about what types of DEI policies are considered discriminatory. It is unclear whether the Trump administration will only target companies with hiring preferences relating to race, color, sex, sexual orientation, religion or national origin, or if it will more broadly challenge DEI policies that generally encourage or promote equity inclusion, such as workplace diversity training programs. Compounding this uncertainty is the increased volume of litigation that is likely to result from the executive orders. Companies will need to closely monitor new legal developments and revise policies accordingly.

The vagueness about what types of DEI policies are prohibited imposes particular challenges for assessing FCA liability. As noted above, EO 14173 requires agencies to insert two new FCA-related contract clauses in government contracts. One clause is a certification that the contractor “does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” The lack of clarity regarding what DEI policies are unlawful makes it difficult to reliably assess whether this certification (and any claims for payment) are false. The lack of clarity also affects the scienter analysis. Under U.S. ex rel. Schutte v. SuperValu, Inc. and U.S. ex rel. Proctor v. Safeway, Inc., scienter is a subjective inquiry, and courts look to contemporaneous evidence and statements regarding a company’s subjective evaluations of compliance to assess this element. Evidence that contractor personnel expressed concerns or uncertainty about whether the companies’ policies are compliant could be used as evidence of scienter. The government or relators may also argue that continuing DEI initiatives after the Trump administration has broadly characterized such programs as “illegal,” presents a substantial and unjustifiable risk of falsity. As a result, if companies want to maintain DEI programs, they should consider seeking clarification from the responsible contracting officer or obtaining legal advice from outside counsel with an eye toward waiving privilege in future FCA litigation, understanding that advice of counsel is an affirmative defense, and one that often is unsuccessful.

The new materiality clause also creates particular challenges for assessing FCA liability. First, if any certification is “false,” the new materiality clause essentially eliminates any potential defense that the falsity is not material to payment. The materiality clause may also increase the types of FCA based-discrimination claims that could give rise to an FCA action. Notably, the materiality clause, unlike the certification, is not limited to “programs promoting DEI”—it provides that compliance “in all respects” with anti-discrimination laws is material to government payment. As a result, companies could theoretically face FCA exposure or need to consider mandatory disclosure obligations stemming from discrimination allegations that are unrelated to DEI initiatives.

Finally, federal contractors should evaluate the risk that contracting officers may determine that DEI policies violate federal anti-discrimination laws. Such a determination would trigger a host of standard remedies for breach of contract, including contract termination, withholding payment or refraining from awarding future contracts.

Implementation of the executive orders

There are also a number of questions about how, whether and when the executive orders will be implemented. Some aspects of the executive orders require no further action to become effective. Others, however, may require notice and comment rulemaking.

With respect to affirmative action plans, EO 14173 effectively revokes a prior order (EO 11246) that is codified in the Code of Federal Regulations and is implemented through several contract clauses.[1] Notice-and-comment rulemaking likely will be required to rescind existing regulations that implement EO 11246.[2] Federal contractors should seek guidance from their contracting officers about how to address the conflict between the current contractual terms and regulations and the new executive order. Federal contractors that also contract with state and local entities should evaluate whether those entities require affirmative action plans and whether elimination of affirmative action plans, per EO 14173, would violate state and local contracts or regulations.

It is unclear how the FCA clauses will be added to government contracts. Generally, new contract clauses are added to the Federal Acquisition Regulations (“FAR”) via notice and comment rulemaking. EO 14173, however, directs agency heads to include these terms in every future contract grant or award. It is possible that agency heads will issue class deviations under FAR 1.404 directing contracting officers to insert these terms into contracts before the rulemaking process is complete.

Legal challenges to the executive orders

Lawsuits are already challenging the legality of the executive orders. The City of Baltimore and three other groups have filed suit to challenge their constitutionality, and have requested injunctive and declaratory relief.[3] The plaintiffs argue that EO 14173 violates the First Amendment because the threat of civil compliance investigations restricts protected speech. The plaintiffs also argue that EO 14173 violates the Due Process Clause because it fails to adequately define what constitutes “illegal” DEI policies that determine whether entities could be subject to civil investigations or other enforcement actions.

Similar efforts to curb DEI policies have faced legal challenges. At the end of President Trump’s first term, he issued EO 13950, which sought to prohibit federal contractors from promoting “divisive concepts” in workplace diversity trainings. Federal contract and grant recipients challenged the order, claiming that it violated the First Amendment by restricting speech and raised due process concerns due to the vagueness regarding the type of workplace training that would be prohibited. In Santa Cruz Lesbian & Gay Cmty. Ctr. v. Trump, 508 F. Supp. 3d 521, the Northern District of California granted an injunction, holding that plaintiffs were likely to prevail on their First Amendment and due process challenges. Ultimately, President Joe Biden’s administration revoked EO 13950, mooting the lawsuit. In Honeyfund.com Inc. v. Governor, State of Fla., 94 F.4th 1272, the Eleventh Circuit also recently affirmed a lower court’s decision enjoining Florida’s “Stop W.O.K.E. Act,” which banned certain mandatory workplace trainings relating to race, color, sex or national origin. The Eleventh Circuit found that the purpose of the law was to restrict speech, not discriminatory conduct, and that the plaintiffs established a likelihood of success on the First Amendment claims.

Here, the Trump administration appears mindful of the possibility of First Amendment challenges. EO 14173 claims that it does not prevent federal contractors “from engaging in First Amended-protected speech.” And, unlike prior efforts to eliminate DEI in the workplace, it does not target specific types of diversity training programs (which are more likely to be characterized as protected speech) and focuses on enforcing federal anti-discrimination laws. EO 14173, however, remains vague about what DEI policies are “illegal” and that vagueness could present a challenge under the Due Process Clause. Moreover, efforts by the Trump administration to broadly declare all DEI policies illegal, not just those that involve preferences in hiring, are susceptible to First Amendment challenges.[4]

Recommendations

In response to the executive orders, federal contractors should work with counsel to evaluate current DEI policies, monitor legal challenges and enforcement actions and seek advice of counsel/guidance from contracting officers.

If courts grant an injunction, federal contractors may have additional time to consider any changes to current DEI policies. They should also consider the risks of other forms of legal action that may continue notwithstanding an injunction, including non-FCA civil enforcement actions, shareholder liability suits, actions for breach of contract and loss of future contracting opportunities.