Update: On February 22, Maryland District Court Judge Adam Abelson issued a Preliminary Injunction halting the rollout and enforcement of the several provisions in the EO. Relevant here, the PI prohibits the Federal Government from requiring any contractor or grantee to make any certification required by the EO; and prohibits the Federal Government from bringing any False Claims Act enforcement action, or other enforcement action, in connection with either the proposed certification or the nine federal investigations to be proposed by each federal agency. The 63-page opinion addressed both First and Fifth Amendment implications of the EO relying, in part, on the vagueness concerns noted below. This is not a final decision on the merits, and the likelihood of additional litigation, included appeals, as well as additional actions by the Administration is highly likely.
On January 21, 2025, President Trump signed an Executive Order (“EO”) purporting to “End[ ] Illegal Discrimination and Restoring Merit-Based Opportunity.” This wide ranging EO contains several provisions directly affecting government contractors—one of which appears to open up government contractors to False Claims Act (“FCA”) liability relating to DEI activities.
The “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” Executive Order generally requires Federal departments and agencies to terminate all discriminatory and illegal preferences, mandates, policies, programs, activities, guidance, regulations, enforcement actions, consent orders, and requirements. Among the EO’s many provisions it:
- rescinds executive orders and Presidential memoranda related to federal actions and initiatives to promote diversity and inclusion, including Executive Order 11246 (Equal Employment Opportunity, September 24, 1965), which required government contractors to adhere to equal employment and affirmative action requirements;
- directs the Office of Federal Contract Compliance Programs to immediately cease promoting diversity and holding federal contractors and subcontractors responsible for taking affirmative action; and
- requires each agency head to include in every contract or grant award a term/provision that makes compliance with all applicable Federal anti-discrimination laws material to the government’s payment decisions, which includes a certification that the contractor/recipient does not operate any DEI programs that violate any applicable Federal anti-discrimination laws.
Under this last provision, each Federal contractor will be required to certify “that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” Thus, the EO appears to create a cause of action under the FCA against companies that operate DEI programs.[1]
Although the EO will make proving a FCA violation easier, the Government will still face hurdles, especially due to the heightened knowledge (scienter), materiality, and causation requirements in the event a case is litigated. For example, “DEI” is in the EO, but the term is not defined, which could lead to challenges to the scope of prohibited DEI activities (as well as the EOs more broadly).
The Government’s assertion, moreover, that a statement is “material” does not, in fact, make it so. As the Supreme Court held in a unanimous opinion authored by Justice Thomas, materiality is a “demanding” standard that is not necessarily satisfied even where a contractor violates an express condition of payment or the Government could have declined to pay the claim had it known of a contractor’s violation of a legal requirement. Universal Health Servs. v. United States ex rel. Escobar, 579 U.S. 176, 194 (2016). The Escobar decision identified some facts that would be relevant to, albeit not necessarily dispositive of, materiality, such as whether the Government “regularly pays a particular type of claim in full despite actual knowledge” of violations. Although materiality is a fact-specific issue subject to considerable litigation and a Court should not grant undue weight to the Government’s own self-serving and unsupported declaration, some Courts are, alas, likely to do so.
Despite potential liability hurdles, the risk of FCA liability is real: a Federal contractor’s false certification that it does not operate any DEI programs now creates the potential for lawsuits, investigations, treble damages—potentially of all dollars received under Federal awards after certifying—and penalties of $28,619 per false claim. The financial consequences of non-compliance get very real, very fast. Even an investigation, as anyone on the receiving end of a FCA Civil Investigative Demand (“CID”) knows, is costly and distracting; litigation is more so.
The EO’s FCA provisions may serve to incentivize an entire class of whistleblowers to file suits under seal against companies with DEI programs. Whistleblower complaints identifying such companies may also be useful to implementing the EO’s provision requiring every Government agency to “identify up to nine potential civil compliance investigations of publicly traded corporations” and other entities, as well as to further anti-DEI actions likely to be taken by the current administration.
Government contractors should be aware that, as a result of the EO, the risk of potential whistleblowers is high and take action accordingly. And, even if the Government still faces challenges in successfully proving at trial FCA violation relating to a DEI certification, a “compliance” investigation under this EO—or other EOs and regulations likely to follow—and/or a CID pursuant to the FCA and resulting Government investigation is likely to be disruptive, costly, and the subject of media and public attention.
FOOTNOTES
[1] The FCA was originally designed to combat, waste fraud, and abuse of Government dollars spent from the federal fisc.