DEI Executive Order Implies Threat of FCA Litigation

On January 21, 2025, the Trump Administration issued Executive Order 14173 focused on diversity, equity and inclusion (“DEI”) programs and their use in the public and private sectors. This Executive Order links compliance with federal anti-discrimination laws to the federal False Claims Act (“FCA”), a powerful anti-fraud tool through which the government can investigate or take action against parties that receive federal funds. The FCA includes a mechanism for private parties to bring such claims on behalf of the government and offers significant financial incentives for doing so.

This Executive Order may be relevant for any entity receiving government payments—including federal contractors, entities receiving federal grants, and any other entity that submits claims for payment—as they may be subject to an FCA investigation or litigation over their DEI programs or similar activities. Additional regulations and contract modifications are anticipated, but federal contractors and companies that receive government funds should act now to assess their DEI programs for legal compliance, as well as their compliance and reporting systems.

Understanding Executive Order 14173: “Ending Illegal Discrimination”

Executive Order 14173, entitled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” was issued by President Trump on January 21 (the “EO”). It directs federal agencies and government contractors to end “illegal preferences and discrimination,” which may include “illegal DEI.” The EO states that many companies and organizations “have adopted and actively use dangerous, demeaning, and immoral race- and sex-based preferences under the guise of so-called [DEI] . . . that can violate the civil-rights laws of this Nation.” The EO directs “all executive departments and agencies (agencies) to terminate all discriminatory and illegal preferences, mandates, policies, programs, activities, guidance, regulations, enforcement actions, consent orders, and requirements.” With respect to the private sector, the EO asks agency leadership to prepare a report on “appropriate measures to encourage the private sector to end illegal discrimination and preferences, including DEI.”

Key for federal contractors, the EO directs the Office of Federal Contract Compliance Programs (“OFCCP,” part of the U.S. Department of Labor) to cease “promoting diversity” and/or “allowing or encouraging federal contractors and subcontractors to engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.” The EO revokes several previous executive orders, including Executive Order 11246, an executive order dating from 1965 that prohibited discrimination by federal contractors and had required affirmative action consistent with now-rescinded OFCCP regulations.

To implement these efforts, the EO directs the head of each government agency to (1) include a term in every contract or grant award stating that compliance with federal anti-discrimination laws is “material” to payment and (2) require all contractors to certify that they do not operate any DEI program violating such laws. As explained further below, these mandates appear designed to meet the requirements to bring an action under the FCA, which is cited in the same section of the EO.

The False Claims Act: A Powerful Statute With A Broad Reading of “Fraud”

At its core, the federal False Claims Act, 31 U.S.C. § 3729 (the “FCA”), allows the government to take action against any party that knowingly submits a false claim seeking a government payment. FCA suits can be brought directly by the government or by private parties on behalf of the government, through the statute’s qui tam provision. These private parties, or “relators” (also referred to as “whistleblowers”), can receive a significant financial reward if the case is successful, up to 30 percent of the total amount recovered. In this way, the FCA incentivizes individuals with information about a potential fraud on the government, such as employees within a larger organization, to share this with the government. Under the FCA, the government is empowered to investigate the claim while the case remains under seal, a process that can go on for months or even years. The FCA gives the government the option to take over the case, known as “intervention.” In other instances, the government may opt not to investigate or may investigate and then decline to intervene, which means the relator can pursue the claims in civil litigation.

What is required to prove an FCA claim? In general terms, an FCA violation requires (1) a false claim or statement, (2) made with the requisite knowledge that it was false, (3) that was material to payment, and (4) led to a payment from the government. Significantly, the first element has been interpreted to cover almost any request for payment, and the term “false” has been read broadly to include both factually and legally false claims. Factually false claims generally involve a misrepresentation as to the type or amount of goods or services at issue. Examples include a contracting party providing fewer of an item than agreed to in the contract, or providing products that fail to meet agreed-upon technical standards. Critically for FCA claims anticipated under the EO, legally false claims include situations where the provider delivers the services requested by the government or as stated in the claim for payment, but fails to satisfy a contractual or legal requirement relevant to the claim or work performed. This type of requirement can take the form of a “certification,” because the party making the claim may have to certify its compliance with relevant contractual or legal requirement—traditionally, this would mean signing a paper in connection with the claim for payment stating that the contractor met all these elements.

Where the claim or documents do not contain a misrepresentation or false statement, there is still the risk the claim may be considered “false” based on an implied false certification. That is, the party making the claim knows it is not meeting a statutory, regulatory, or contractual requirement, and still submits a claim for payment and fails to disclose its non-compliance. This implied false certification theory was recognized by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar (2016), which explained that FCA liability “does not turn on whether those requirements were expressly designated as conditions of payment,” but rather, depends on “whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision” (emphasis added). Accordingly, FCA liability may hinge on showing the false statement was material to payment.

Applying the False Claims Act to DEI Issues: Incentivizing Employees

So how does the EO work in combination with the FCA? In practical terms, the FCA is designed to incentivize parties with information about a potential fraud to bring this information to the government. The FCA allows private citizens to bring such suits and receive potentially significant financial rewards, as described above. In practice, this process has been critical to the FCA’s success: as the government recently announced, of the $2.9 billion it recovered under the FCA last fiscal year, most of that amount was from cases that originated as qui tam actions.

The EO sets out specific federal contracting provisions that appear to correspond to elements of an FCA claim. The EO’s language states that compliance with federal anti-discrimination laws is “material” to payment, the same term used in the FCA, 31 U.S.C. § 3729 (a)(1)(B), and highlighted by the Supreme Court, as discussed above. Critically, such language, even if formally incorporated into a contract (as directed under the EO), is not dispositive of the materiality inquiry. Nevertheless, given the EO’s directive to add a materiality term to the contract, the government may in future litigation argue that such language is evidence that government considers this issue important to the payment and further argue that the party seeking payment was on notice of the same.

The FCA also includes broad anti-retaliation provisions that prohibit an employer from acting against an employee who may engage in protected activity. This provision protects anyone lawfully acting to raise a claim under the FCA, even if the underlying FCA claim is unsuccessful. In practice, this means a company can violate the FCA simply by taking retaliatory action against a relator.

What to Expect Next?

This Executive Order calls out federal contractors and grant recipients, both of whom generally operate under written agreements with the federal government that include specific terms of performance. The government may also look to make the same arguments under the FCA to pursue other entities that make claims for government payment, including health care providers, entities that receive other forms of research funding, government-insured programs, and even companies that receive substantial one-off payments.

As directed by the EO, the government is likely to begin including the materiality clause (requiring “compliance in all respects with all applicable Federal anti-discrimination laws is material to the government's payment decisions”) and certification requirements (requiring contractors or grant recipients to “certify that [they do] not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws”) into new contracts. Agencies may also look to revise existing agreements to incorporate the same. These changes are likely to be litigated, but (as noted above) even if the government is successful in adding such language, these terms are not dispositive of FCA liability.

The government may soon begin receiving whistleblower complaints making allegations relating to DEI programs. Although such claims may be difficult to fully evaluate before certifications are prepared or the contemplated materiality provision is added to federal contracts and grants, the government can still listen to such allegations. In some instances, the government may even elect to begin investigating the issue, such as by issuing Civil Investigative Demands (“CIDs”) to companies targeted by such allegations. Potentially related, a memo issued on February 5 from new Attorney General Pam Bondi instructs the Department of Justice’s (“DOJ”) Civil Rights Division to make efforts to “investigate, eliminate, and penalize illegal DEI” programs. The memo calls for “proposals for criminal investigations and ... potential civil investigations,” as well as “[a]dditional potential litigation activities.” It remains to be seen whether the DOJ will consider whistleblower complaints under the FCA as an avenue for identifying new cases.

Potential Damages

The FCA imposes potentially significant damages and penalties. This includes potential treble damages for FCA violations, which allows the government to seek a damages figure of up to three times the amount of the government’s loss. A potentially complex calculation, the government often starts by asserting that its loss is equal to the total contract value—then multiply by three.

The FCA also includes a separate and potentially additional per-claim penalty of from $14,308 to $28,619 per claim. The government’s position is that this per-claim penalty amount should be applied every time a contractor or service provider bills the government, meaning every separate request for payment. In addition, parties subject to FCA actions may also face significant collateral consequences, including the risk of debarment participation in federal programs or outside civil suits, such as shareholder class actions.

What to Do Next?

Given the possible exposure, companies need to take the potential risks posed by EO 14173 seriously.

1. Assess if your company or organization receives any federal funds and how you make claims for payment. Many companies that don’t consider themselves “government contractors” may still receive federal funds.
2. Review all DEI programs and communications about such programs to ensure they are not, and would not be construed as, promoting unlawful or illegal DEI. The EO repeatedly notes that the focus is on “discriminatory” or “illegal” DEI programs and policies.
3. Ensure a robust set of policies and practices aimed at preventing discrimination in the workplace. Given the EO’s focus on non-discrimination generally, employers should review all non-discrimination policies, trainings and codes of conduct, as well as ensure a robust and effective process for investigating and addressing all internal complaints of discrimination.
4. Review your whistleblower hotline program and compliance training. Companies should ensure employees are familiar with and, to the extent possible, comfortable using internal systems to report potential issues. Employees at all levels, but particularly managers, legal and HR team members, should be familiar with whistleblower protections and avoid taking any employment action that risks violating the FCA.