Federal Contractors' Potential False Claims Act Liability for Failure to Comply

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Background

The Trump administration recently issued a series of executive orders aimed at restricting diversity, equity, and inclusion (DEI) programs. These executive orders have impacted businesses and organizations across the public and private sectors by revoking prior executive orders that promoted DEI and imposing new compliance obligations to “combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.”

Executive Order 14173 (“EO 14173”), titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” is of particular concern for federal contractors—those businesses and other organizations that contract with the United States government to provide goods or services in exchange for funds appropriated by Congress. Among other things, EO 14173 directs federal agencies to require that contractors certify that they do not “operate any programs promoting DEI that violate any applicable federal anti-discrimination laws.” Importantly, EO 14173 also requires certification that “compliance in all respects with all applicable federal anti-discrimination laws is material to the government’s payment decisions” for False Claims Act (FCA) purposes. This means that federal contractors may face significant legal exposure if they fail to align with EO 14173, including potential exposure to liability under the FCA.

The False Claims Act and Federal Contractors
The FCA imposes liability for a knowing submission of false or fraudulent claims for payment to the U.S. government. Particularly relevant to EO 14173, contractors can also be held liable for materially false or fraudulent statements made to influence contract payments if those statements are “material” to the government’s decision to make the payment. By specifically invoking the element of materiality requiring certification, EO 14173 signals that the administration intends to enforce its policies through the FCA.

In February, a federal district court in Maryland issued a preliminary nationwide injunction that temporarily halted enforcement of elements of EO 14173. Most notably for federal contractors, the injunction prohibited implementation of the “certification provision” of EO 14173. But that temporary relief was short-lived—the Fourth Circuit soon allowed the federal government’s request to stay the injunction pending appeal. As a result, federal agencies can renew efforts to require federal contractors to certify compliance, subject to potential liabilities under the FCA. In considering the government’s appeal, the Fourth Circuit will address the ultimate issue of whether the certification obligations are lawful to begin with. However, in light of this recent ruling, it is important that federal contractors take measures to ensure that their policies and programs are free of “illegal DEI.”

Although the EEOC has recently released guidance documents that attempt to define the contours of prohibited DEI programming, what exactly constitutes “illegal DEI” remains very much in question. But, in light of EO 14173, federal contractors that have existing DEI programs and initiatives and make statements about compliance with the Trump administration mandates, could potentially be in violation of the FCA.

Potential Exposure to False Claims Act Liability and Penalties

Federal contractors that fail to comply with the Trump administration’s DEI executive orders could face exposure to FCA liability. Contractors who falsely certify compliance with the Trump administration’s DEI related executive orders (or fail to update their certifications) risk submitting false claims that could trigger FCA liability. In addition to legal action initiated directly by the government, employees or subcontractors who observe or are involved in non-compliant (or what they assert are non-compliant) activities could file “whistleblower” lawsuits under the FCA, further increasing the risk of exposure and liability.

Under the FCA, contractors found in violation may be subject to monetary penalties per false claim, along with treble damages (three times the amount of damages the government sustains due to the false claim). Contractors found in violation of the FCA may risk losing existing federal contracts and being barred from future contracting opportunities. Even allegations of non-compliance with federal executive orders can harm a federal contractor’s future ability to secure government contracts.

Recommendations for Federal Contractors

Under EO 14173, it is not per se illegal to maintain DEI policies and programs. But, to mitigate the risk of FCA liability, federal contractors should consider the following actions:

  • Conduct a Comprehensive DEI Compliance Review: Audit and assess all DEI-related programs, policies, and training materials to ensure that they align with the Trump administration’s executive orders and anti-discrimination laws.
  • Update Certifications and Contract Filings: Review all certifications of compliance with federal contracts, especially those involving DEI-related programs, to ensure they are accurate and up to date with the current legal landscape.
  • Revise Training and Educational Programs: Review and revise any DEI training that could be seen as violative of the Trump administration’s DEI policies.
  • Consult Legal Counsel: Given the complexity and potential legal risks surrounding compliance with the Trump administration’s DEI-related executive orders, federal contractors should consult legal counsel who can review their current policies, monitor changes or revisions in federal policy, and advise on adjustments to practices to avoid FCA violations.

The Bottom Line

Despite the ambiguity of what exactly constitutes “illegal DEI,” failure to comply with the Trump administration’s DEI executive orders, particularly in the context of alleged false certifications and misrepresentations related to diversity training and workforce programs, exposes federal contractors to significant risks under the False Claims Act. Contractors should consult legal counsel to ensure full compliance and avoid potential liability.

This is a rapidly evolving area of the law and HRW will continue to strive to keep employers updated on any changes. For questions or more information, please contact:


Source(s):

Gasson, E. (2025, April 2). Federal Contractors’ Potential False Claims Act Liability for Failure to Comply | Hirsch Roberts Weinstein LLP PFML Update. Hirsch Roberts Weinstein LLP. https://www.hrwlawyers.com/news-and-events/client-alerts/federal-contractors-potential-false-claims-act-liability-for-failure-to-comply/?utm_source=elinfonet

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