Receive federal dollars? Check your DEI compliance.

If you are a federal contractor or grantee, running afoul of the Trump administration’s hardline stance against Diversity, Equity, and Inclusion (DEI) could leave you facing a costly investigation, substantial penalties and treble damages, and, potentially, suspension and debarment.

In January 2025, President Donald Trump signed Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” (the Order). The Order aims “to combat illegal private sector DEI preferences, mandates, policies, programs, and activities.” To this end, the Order requires the inclusion of two new terms in federal contracts and grants that expose federal contractors to significant exposure under the False Claims Act (FCA).

The FCA is a federal law allowing the United States to recover damages resulting from false claims for payment to the government. FCA claims may be filed either by the government or by a whistleblower (a “relator” under the statute). Relators file FCA complaints under seal to allow the government an opportunity to investigate the allegation prior to litigation. FCA investigations can be costly and time consuming, even if the claims are dismissed prior to litigation. If an FCA case proceeds to litigation following the investigation, the potential liability under the statute is significant. The penalty for violating the FCA ranges from a minimum of $14,308 to a maximum of $28,619 per false claim. The government is also entitled to treble damages, or three times the amount of harm it sustained. FCA violations can also result in suspension and debarment.

Liability under the FCA arises when three elements are satisfied:

1. A claim for payment was false or based on a false statement;

2. The falsity was material to the government’s payment decision; and

3. The defendant acted knowingly.

The Order increases contractors’ FCA risk by requiring new contract terms targeted at the first two elements of an FCA claim. First, contractors must now certify they do not have “any programs promoting DEI” that violate anti-discrimination laws, which could constitute a false statement or claim if the contractor’s DEI policies are discriminatory. Second, the Order requires contractors to agree that their compliance with anti-discrimination laws is material to the government’s payment decision.

In most cases, FCA liability for alleged discriminatory DEI practices will depend on whether the policies violate anti-discrimination laws and whether the contractor knew those policies were discriminatory. Knowledge under the FCA is subjective and it includes actual knowledge and deliberate ignorance or reckless disregard of truth or falsity. The Order does not provide contractors with any guidance about what DEI policies the administration views as illegal and there is little case law on this issue. While this ambiguity may help a contractor establish that it lacked knowledge of a violation, the government may use that uncertainty to argue the contractor recklessly disregarded the risk that its DEI policies were illegal.

Federal contractors can minimize exposure by retaining legal counsel to evaluate DEI policies for compliance with federal law. If you have received a subpoena or Civil Investigative Demand seeking information about your DEI policies, you should retain experienced counsel to assist you with responding to the requests.